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Market Meltdown: Understanding 300 Years of Credit Crises Dr. Mark Mullins Executive Director Fraser Institute January 13, 2009
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“Prosperity, boom, crisis, slump, and recovery succeed each other with a regularity that suggest(s) inevitability” Professor T. S. Ashton Economic Fluctuations in England 1700-1800 1959
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“If a panic were to pass a certain height, that system, which rests on confidence, would be destroyed by terror” Walter Bagehot Lombard Street: A Description of the Money Market 1873
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History Market Meltdown
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Past Crises Source: Mullins
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Past Episodes Year StocksEvent 1701-41%Spanish Succession 1721-78South Sea Bubble 1722-43South Sea Bubble 1797-34French Invasion 1803-32Recession 1826-20South America 1837-24Foreign Investments 1848-28Railways 1866-27Bank Collapse 1877-34Depression 1893-27Gold Standard 1900-32Recession 1903-35Rich Man’s Panic 1907-45Bankers’ Panic 1913-24War Threat 1917-38WWI 1920-39Post War Bust 1921-29Post War Bust 1929-48Crash 1930-46Depression 1931-60Sterling 1932-74Depression 1938-48War Threat 1939-22War Threat 1940-27WWII 1941-22WWII 1942-28WWII 1946-23Post War Bust 1962-27JFK and Steel 1966-25Credit 1970-33Recession 1974-41Oil Shock 1978-23Stagflation 1982-22Recession 1987-36Crash 1990-21Recession 1998-19Asian 2002-27High Tech 2008-52Credit Source: Mullins
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Leading Stock Markets Source: S&P 500, Various Historical Indices
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Causes Market Meltdown
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“A previous record of delinquency, foreclosure or bankruptcy; a credit score of 580 or below … and a debt service-to-income ratio of 50 percent or greater” Professor Paul Mizon The Credit Crunch of 2007-2008 Federal Reserve Bank of St. Louis Review Subprime Borrower
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US Subprime Originations Source: Mortgage Bankers Association
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US Housing Prices and Rates Source: S&P/Case-Shiller, HSH Associates, US Federal Reserve Board
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Scale Market Meltdown
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Global Stock Markets Source: World Federation of Exchanges, Mortgage Bankers Association, Author’s Calculations
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Credit Crisis Market Meltdown
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US Commercial Paper Rates Source: US Federal Reserve Board
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US Commercial Paper Rates Source: US Federal Reserve Board
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Interbank Lending Rates Source: US Federal Reserve Board, British Bankers Association
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Risks and Impact Market Meltdown
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US Bank Loan Losses Source: IMF Global Financial Stability Report
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Global Asset Writedowns Source: IMF Global Financial Stability Report
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US Production and Jobs Source: US BEA, Federal Reserve
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Oil Prices and Inflation Source: US BEA; UNDP
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Commodity Prices Source: Federal Reserve; CRB
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Dr. Copper Source: Federal Reserve; CRB
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Gold and Real Rates Source: Federal Reserve
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US Trade-Weighted Dollar Source: US FRB
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Commodity Prices and C$ Source: CRB; Bank of Canada
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Looking Forward Market Meltdown
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Leading Economic Indicators Source: OECD
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Leading Economic Indicators Source: Conference Board; Statistics Canada
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Indicators of Coming Stability Source: US Federal Reserve Board, British Bankers Association
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US Yield Curve Prediction Source: Federal Reserve
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US Real Bill Rate Prediction Source: Federal Reserve
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The Real Leading Indicator Source: MSCI Barra
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Stock Market Comparison: I Source: Dow Jones; MSCI
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Stock Market Comparison: II Source: Dow Jones; MSCI
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Stock Market Comparison: III Source: Dow Jones; MSCI
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Stock Market Comparison: IV Source: Dow Jones; MSCI
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Stock Market Comparison: V Source: S&P; MSCI
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Policy Market Meltdown
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Central Bank Assets to GDP Source: Various Central Banks, Author’s Calculations
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Mining Survey: Policy Potential Source: Fraser Institute
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Policy Summary Social housing policy, Freddie and Fannie: regulation and underwriting standards The monetary policy cycle 21 st century bank runs: Lehman Brothers and others Central Banks: lend freely to solvent entities at penalty rates Prudential regulation: leverage, maturity matching and risk pricing Market insurance Social banking policy Exit strategy – not “stimulus”
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Villains and Victims Risky business models: borrowers and lenders Leveraged entities and markets Iceland, Hungary, Serbia, Ukraine, Belarus, Turkey, Pakistan, South Korea, Argentina, Russia – not Canada Central banks Greed and market rhetoric Social policy advocates Banking structure Optimal public policy – and taxpayers
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What About You? The lessons of history The market outlook The economic outlook Policy and politics
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Market Meltdown: Understanding 300 Years of Credit Crises Dr. Mark Mullins Executive Director Fraser Institute January 13, 2009
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